Standard Bank: Russia-Ukraine war makes African free trade more urgent

By David Whitehouse
Posted on Wednesday, 20 July 2022 06:00

Customers queue to draw money from an ATM outside a branch of South Africa's Standard Bank in Cape Town REUTERS/Mike Hutchings
Customers queue to draw money from an ATM outside a branch of South Africa's Standard Bank in Cape Town REUTERS/Mike Hutchings

The war between Russia and Ukraine has heightened the urgency of implementing the African Continental Free Trade Area (AfCFTA), Yinka Sanni, CEO of Africa regions at Standard Bank, tells The Africa Report.

The war shows it is crucial to enable African countries to import from each other “rather than relying on Europe,” Sanni says in Lagos. Countries need to “pump up production capacity where they have comparative advantage.”

Research by the United Nations Development Programme (UNDP) in May says that the impact of the war could push Africa into “serious debt distress” and increase inequality as higher food and fuel prices hit the poorest households hardest. Priority actions include reducing Africa’s dependency on food and fuel imports and using AfCFTA as a platform to raise productivity and investment, the UNDP says.

The Russian conflict has shown the extent to which Africa is integrated in the global economy, Sanni argues. He notes a “dramatic increase in the need for financing” among African corporates and governments as currencies have been devalued and inflation has climbed.

That creates opportunities as well as problems. Sanni sees Africa’s glass as “half full rather than half empty.” South Africa has such an advantage in automotive manufacturing, while Ethiopia can increase wheat supply, he says. In Nigeria, Dangote’s oil refinery, once completed, should allow the export of refined products, while the group’s fertiliser plant also needs to export to the west Africa region, Sanni says.

  • He wants to increase the bank’s investments in Nigeria. The bank owns 67.5% of Stanbic IBTC and Standard Bank plans to make use of its regulatory authorisation to raise that to 70%, Sanni says.
  • There may also be more investment in Kenya, where the bank has “long-term confidence” in the market.
  • Ethiopia is a market which “excites” Standard Bank in the long term. Licensing of foreign financial-services providers will start at some point, Sanni says.
  • When that happens, subject to the details, the bank may upgrade from its current representative office to having an Ethiopian subsidiary, he says.
  • The contribution of the rest of Africa to the group’s headline earnings, which currently stands at 35%, “should continue to grow,” Sanni says.

Distribution

The bank, Africa’s largest by assets, is present in 20 countries on the continent. Its distribution strategy will continue to rely on a mixture of digital channels, bank branches and partnerships, Sanni says. Discussions with fintechs on new partnerships to help with “last mile” distribution are ongoing, he says.

In some markets, 90% of transactions are now being carried out by digital means. But the decision to open a branch near the Dangote refinery shows that branches still have a part to play, he adds.

The bank’s exposure to sub-Saharan Africa poses “some asset quality risks, given the challenging and more volatile nature of those jurisdictions,” compared with South Africa, according to a credit opinion from Moody’s in April. The risks are “mitigated” by the bank’s “disciplined approach and conservative selection of sectors and clients,” Moody’s says.

  • Return on equity stood at 13.5% in 2021, versus 8.9% in 2020. Moody’s expects profitability to continue its post-pandemic recovery this year.

EACOP

One project that has drawn controversy is the planned East African Crude Oil Pipeline (EACOP) between Uganda and Tanzania. Oil from Uganda will be transported to the port of Tanga in Tanzania via the pipeline, in which TotalEnergies has a 62% stake.

Construction is planned to start in 2023 in the face of opposition from Ugandan civil-society organisations. The Dutch campaigning organisation BankTrack says that at peak production, emissions of oil transported through the pipeline will exceed the current emissions from Uganda and Tanzania combined.

Moody’s notes that the bank is facing mounting business risks and stakeholder pressure to meet carbon transition goals. Standard Bank says it’s committed to net-zero carbon emissions from its own operations by 2040 and from its portfolio of financed emissions by 2050. But it’s leaving its options open on financing EACOP, which many global banks and insurers have refused to back.

  • The bank is continuing to review an independent report into the environmental and social impacts of the pipeline, Sanni says. “We have been assured by TotalEnergies that they will be compliant with equitable issues,” he adds.

Bottom line

Citing an assurance from TotalEnergies suggests that Standard Bank wants to be involved in EACOP once its own ESG due diligence is complete.

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